Bank capital levels still too low, says Sir John Vickers

Banks should raise capital levels to double the current norm, Sir John
Vickers, the man responsible for drawing up Britain’s series of post-crisis
reforms, has said.

Anthony Browne, chief executive of the British Bankers’ Association, argued in the Sunday Telegraph that at 4pc, "the leverage ratio [also] changes from being a fall back measure to the main constraint on banks’ lending".Photo: PA

Sir John told the Financial Times that in a "blue-skies" world, banks’ core tier one capital ratios would now be 20pc, rather than the 10pc he recommended as chair of the Independent Commission on Banking.

"The skies are cloudy [at the moment]", he said, but urged policymakers to push banks to strengthen capital levels once lenders were in better shape to do so.

He also said a 3pc leverage ratio, which forms part of the Basel III voluntary rulebook on bank capital adequacy, was "not very sensible".

Such a ratio means that for every £33.33 lent, banks must hold £1 in reserve in case the borrower defaults on the loan. However, Sir John said he believed the right leverage ratio was closer to 10pc.

“It is not very sensible to run a market economy on the basis of a banking system that is 33 times leveraged, let alone 40 or 50 times leveraged," said Sir John.

Anthony Browne, chief executive of the British Bankers’ Association, argued in the Sunday Telegraph that at 4pc, "the leverage ratio [also] changes from being a fall back measure to the main constraint on banks’ lending".

"Banks could be incentivised to chase the higher risk and higher return businesses instead of giving families with good credit histories affordable mortgages. Not only would the cost of mortgages increase for customers, it is the exact behaviour policy-makers are trying to avoid," he said.